From: Keith Fishe [kfishe@DRWTradingGroup.com]
Sent: Friday, February 14, 2003 1:09 PM
To: rule-comments@sec.gov
Cc: roeserj@sec.gov
Subject: FW: SR-BSE-2002-15
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th St., NW
Washington, DC 20549-0609
Dear Mr. Katz:
Re: SR-BSE-2002-15, Boston Stock Exchange, Inc. Filing to Establish
Trading Rules for the Boston Options Exchange Facility
The BOX represents a long-awaited evolutionary step toward accessible
electronic markets for equity options. While not the first electronic options
exchange, the BOX addresses key competitive issues providing added benefits to
retail option customers and a majority of liquidity providers. The BOX
shareholders have articulated many of the benefits of the BOX, but there are
some key structural features that should be heralded.
Most importantly, in the interests of all market participants, the BOX
has NOT embedded technology limitations or membership constraints to limit the
number of liquidity providers. By allowing more participants, the BOX promotes
a more competitive price making environment, greater stability and market depth.
Another key structural issue involves the order prioritization method and
its effect on competition. Public exchanges stand in between the customer and
the liquidity provider and hence capital and credit are not an issue in
exchange-traded derivatives. However, the playing field in equity derivatives
has become increasing skewed. The current market structure has not allowed the
greatest number of qualified firms to participate as liquidity providers on some
equity option exchanges. Some of these exchanges that have based order priority
on quantity/price have re-introduced the credit/capital issue into market making
competition leading to a reduction in the number of qualified liquidity providers.
Since the average number of contracts per trade in US equity options is somewhere
around 20 contracts, a liquidity provider competing for a pro-rata share of an
option order where market-makers are 1000 up, essentially means that competition
is unnecessarily based on one's balance sheet and not on the best price. A few
firms with deep pockets can be tempted to penalize smaller market makers who make
tighter prices. In contrast, the BOX's price/time priority method encourages a
greater number of qualified firms to provide liquidity and thus allows the
mechanics of a public exchange to work as intended.
Regards,
Keith Fishe
DRW Holdings, LLC
Chicago, IL